5 Rocket Stocks to Buy in October - views

BALTIMORE (Stockpickr) -- Stocks started October off on a high note last week, with the S&P 500 pushing 1.41% higher between Monday and Friday to extend Mr. Market’s gains to 16.2% since the start of the year. “New month, new market” is an expression that’s held surprisingly true in 2012, so the first week of October is a good indication that we’ll see an end to the correction in stocks that spanned much of September.

That’s even more likely now that earnings season is a day away from “officially” getting started.

To take full advantage, we’re turning to a new set of Rocket Stock names this week. For the uninitiated, “Rocket Stocks” are our list of companies with short-term gain catalysts and longer-term growth potential. To find them, I run a weekly quantitative screen that seeks out stocks with a combination of analyst upgrades and positive earnings surprises to identify rising analyst expectations, a bullish signal for stocks in any market. After all, where analysts’ expectations are increasing, institutional cash often follows.

In the last 171 weeks, our weekly list of five plays has outperformed the S&P 500 by 76.49%.

International Business Machines
$240 billion information technology giant International Business Machines (IBM) has done a good job of keeping pace with a fast moving market this year. Shares of the firm have rallied 14.5% since the start of January, with 1.61% dividend yield tacked on top. Now, with third-quarter earnings slated for next week, Big Blue is one Rocket Stock name that looks primed to push ahead of the S&P.

IBM is one of the biggest IT firms in the world, selling its computer hardware, software and services to other businesses around the globe. The firm is the league leader in the mainframe business, a complex business that has high barriers to entry, and it’s able to trade off of its name to generate heftier premiums for its services than many peers. That’s particularly true given the fact that IBM has a bigger service catalog than other IT firms. As a result, it’s able to pull more value out of its customer Rolodex than most rivals can.

The past decade has been volatile for the tech industry, but IBM has proven prescient. The company unloaded its personal computer unit to Lenovo back in 2005, well before the commoditization of PCs was a major concern for most computer makers. In its place, the firm moved into lucrative (and high margin) consulting jobs and hardware sales where it could get deeply integrated into clients’ operations.

IBM also has an impressive history of returning cash to shareholders in the form of dividends and buybacks; last year, the firm spent $16.07 billion to boost shareholder returns. Investors should pay attention to those priorities.

Walt Disney

Walt Disney (DIS) is the poster child for the term “economic moat.” The firm’s catalog of valuable brands and characters spans from the obvious (think Mickey Mouse and Donald Duck) to the less obvious (ESPN, for example). That deep vault of intellectual property fuels an impressive business for the Burbank, California-based firm. Because Disney has its hand in everything from media networks and movie studios to theme parks to merchandise, DIS can leverage the same characters across all of its businesses for substantial profits.

It’s that exact logic that spurred Disney’s acquisition of Pixar way back in 2006 – the firm realized that its most popular characters of the last decade had come from its partner, so it bought the Steve Jobs-backed studio more for its creative acumen than its technical talent. And that move has been paying off in spades. Likewise, Disney has a cash cow in sports network ESPN, which makes up the biggest chunk of its TV profits. ESPN is the most valuable network on TV, measured by the affiliate fees that providers are willing to pay to carry the channel. While it’s not a cheap business to run (ESPN pays the NFL $1.8 billion annually to carry Monday Night Football), it is a lucrative one.

Theme parks have been a drag on Disney’s earnings for the past several years. They’re monstrously costly to operate, and under recessionary headwinds fewer consumers have been willing to shell out the cash to take their families to the “happiest place on earth.” That said, the late-stage nature of theme parks has the potential to add a significant boost to Disney’s profitability once the recovery does come full circle. When times are good, the cash that parks throw off is impressive.

Investors should watch closely when earnings drop on Nov. 7.

Visa

Visa (V) is no slouch when it comes to having an economic moat either. The global payment network has its logo printed on more than 60% of the world’s payment cards. While that puts a big target on Visa’s back, it’s going to be hard for newcomers to take on the success that Visa has built among consumers and among merchants, both of whom see Visa acceptance as requisite to do business.

Payment card acceptance is a positive feedback loop. Consumers see Visa’s network accepted everywhere they shop, so they’re more likely to get a Visa-braded card, and merchants see more customers whip out a Visa than any other brand, so they’re more willing to keep accepting Visa. That makes the firm’s network extremely hard to replicate for new networks unless it's willing to take a huge haircut on the fees it charges. In my view, only American Express (AXP) has been able to buck that trend, charging much higher rates for purchases, but its acceptance rate suffers as a result.

It’s also important to remember that Visa’s the payment network, not the credit card issuer. Visa’s bank partners issue the actual cards, taking the credit risk away from Visa’s balance sheet. Better still, the firm was at the forefront of the debit card trend, a move that spared it from getting hammered after 2007 when consumers started eschewing credit in favor of cash.

Visa is certainly no value play right now -- it’s a pricey stock. That said, its momentum trajectory looks intact, so we’re betting on shares in October.

Eli Lilly is no stranger to blockbuster drugs; the firm’s patent list includes names like depression drug Cymbalta and ED pill Cialis, the types of recognizable names that are must-haves for a big pharma firm. But more important, a hefty pipeline of attractive late stage therapies bodes well for investors in the next few years. With the patent expiration cliff still causing a lot of anxiety in pharma investors (and in part spurring the huge dividend yields in the industry right now), that pipeline is quickly becoming more important than the existing drugs are.

And Eli Lilly has the wherewithal to continue developing those new offerings. The firm currently sports more than $11 billion in cash and investments on its balance sheet, offsetting around $5.5 billion in debt. With cash making up around 20% of LLY’s market cap, the risks of investing in this name are hugely diminished as long as this stock can keep borrowing money at lower rates than its returns on capital.

Priceline.com

William Shatner has apparently been earning his keep as spokesman for online travel site Priceline.com (PCLN). Shares of the $31 billion stock have rallied more than 35% since the first trading day of January, performance that’s around twice as good as the broad market’s impressive run. Now the firm’s performance looks well suited to continue thanks to a focus overseas that’s been earning impressive returns for the Connecticut-based firm.

The U.S. travel market is largely commoditized at this point. It’s becoming increasingly common for travel sites to pen “lowest price” guarantees with hotels, a phenomenon that effectively means that it doesn’t matter where you buy your next trip; you’re probably going to end up paying the same price anyway. But there is a lot more flexibility abroad, particularly in emerging markets in Asia and Latin America. There, consumers are looking for travel outlets that have the biggest inventories of rooms and air carriers, and experienced travel firms like Priceline are well positioned to take advantage as a result.

To be sure, the U.S. is still an important battleground for Priceline, mainly because it established itself as a leader back in the early days. While that means that PCLN is unlikely to relinquish its revenues earned here at home, it also means that the firm is unlikely to see its margins expand here either. With plenty of cash on its balance sheet to invest in building its network abroad, PCLN looks well positioned to take advantage of a cyclical low in the travel industry.

We’re betting on shares of this Rocket Stock this week. Just stay tuned for third quarter earnings on Nov. 5.

At the time of publication, author had no positions in stocks mentioned.

Jonas Elmerraji, based out of Baltimore, is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.